How to Estimate Your Future Social Security Benefit

Aug 15, 2007

Article By: Scott Burns

Q. I am 56. I retired after 30 years of teaching at the age of 52. I plan to take Social Security at age 62. My understanding is that for the 10 years I will have been retired and have not contributed to Social Security, the benefit I will get will be decreased a small percent each of those 10 years. A friend told me that something has changed and that my amount will be based on the average of my 30 years of salaries and not my last 5 highest years. And there will be no yearly decrease for each of those 10 years I have not been working. Is this correct? ---V. B., by email

A. Your Social Security benefit is based on your earnings record, up to a maximum of 35 years. If you work more than 35 years, the calculation is based on the highest 35 years of earnings. If you work less than 35 years, the no-earnings years will count as zero and will lower your average and, hence, your benefit. If you visit the Social Security website, you will find that it offers three calculators to help you figure out what your benefit is likely to be. The link you want to use is www.ssa.gov/planners/calculators.htm and the calculator you should use is No. 2, the Online Calculator. It will ask you to select when you want to start benefits and to input your earnings record. Then it will estimate your future benefit. You’ll find your complete earnings history on the annual statement you receive in the mail each year from Social Security. Given the importance of Social Security for all but the wealthiest people, I think one of the best “investments” you can make is to take the time to become familiar with this very useful and well-managed website, www.ssa.gov.

Q. My wife and I are 59 and about to retire. We have a portfolio of $2.1 million. We currently own a waterfront lake house that is worth about $350,000 with no mortgage, a house for my mother worth about $75,000 with no mortgage, and our main residence worth about $300,000 with a $100,000 mortgage. We have found a new house close to our daughter and her husband, priced at $650,000.Our question: Do we pay cash for the new house? Or do we take a mortgage and work from the interest on the $2.1 million? I will earn $2,000 a month from a teacher pension. This amount is after group health insurance is taken out. My wife will have Social Security at age 65 in addition to our portfolio. Our financial adviser wants us to take the mortgage, but we are very unsure how we should go. He says we can earn 10 percent, pay the mortgage and still have money to use. ---B.C.G., by email from Dallas, TX A. If the decision is between borrowing or paying cash, the more prudent decision is to pay cash. I’ll explain why in a minute. But the real decision is bigger than that. It’s whether you should make this change at all or whether you are willing to sell your lake house along with your primary residence and consolidate into a more expensive house close to your daughter. You can understand by examining the cash flow changes. In moving to a more expensive house you’ll be increasing your mortgage from $100,000 to $450,000. At current jumbo rates (6.63 percent) that would cost $2,883 a month, or about $34,595 a year. In addition, you’d have higher expenses for real estate taxes, insurance, and operating expenses. You’re likely to find yourself “house poor.” Your investment portfolio of $2.1 million, meanwhile, can sustain a safe withdrawal rate of 4 percent. Maybe 5 percent. Call it $90,000 a year. If you withdraw at a higher rate, you have a significant chance of putting yourself in a downward spiral if there is a significant market decline. So if you withdraw at a safe 4 percent rate, the 7.7 percent a year constant payment on the mortgage (principal and interest) will cut deeply into the income you have available for other spending. If you withdraw at a 7.7 percent rate, at least for the mortgage payments, there is a major chance your portfolio won’t last as long as the mortgage. Your adviser is correct when he says that your investments may return 10 percent a year. But you will have to be 100 percent invested in equities to do that--- and that means more risk. Meanwhile, you will have committed to making 360 monthly mortgage payments, rain or shine, up or down market. That loads the deck against you when you are retired. A more prudent plan would be to sell the lake house and your primary house for gross proceeds of about $650,000 and buy the $650,000 house near your daughter. Just remember that lakes don’t move, but daughters sometimes do.

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